We have all kinds of fascinating conversations in the OR. Whenever I dare to suggest that people need at least $1 million to retire (some people now say you need much more), I typically get the “have you totally lost your marbles” look. In fact, I recently saw an online report that said that a couple with two kids needed $3.5 million to retire comfortably.
Surely, a mil sounds like a lot of money … until you do the math.
Financial advisers often say that if you do have a $1 million nest egg the day you retire, you should only withdraw about 4 percent during the first year. Then during the following years, you should adjust that amount for inflation to maintain your standard of living.
I didn’t make that up, believe me. Here is a quote from a recent article1 on the subject: “If you withdraw 4 percent of your savings in the first year of retirement and boost that amount annually for inflation, chances are your money will last 30 years.”
But back to our example. Let's do the math for year one of our theoretical retiree: 4 percent of $1 million is $40,000.
So the question becomes, can you retire on $40,000 a year during retirement? Some people say that when you retire, you need less money than during your work life, because you have fewer bills: no mortgage if you're extremely lucky, no kids to raise or help through college if you're very lucky, no professional dues or clothing or insurance, no more commuting to work, etc.
Others argue that you actually need more money during retirement if you intend to do all the things you've promised yourself for years: hang out with your golf, fishing, hunting or knitting buddies, start traveling, spend more time enjoying your hobbies, help out struggling kids, care for a sick spouse, pay for ever-increasing medical bills, pay for home care or nursing home care etc.
Obviously it is complicated to figure things out, especially because everybody's situation and health are so different. Some of the calculation is based on speculations. So again, will you be able to retire on $40,000 a year?
Now, here are a few problems with our 4 percent concept:
* A million-dollar nest egg doesn't mean much. Is it all in stocks and equity mutual funds, i.e. poorly protected from yet another financial crisis? Or by then, will it all be in bonds and CDs (which currently don’t pay much)? Or will it be an appropriate mix of stocks, bonds and cash?
* Will you periodically reallocate your portfolio, for example by shifting money from stocks into bonds and other income-producing investments as you approach retirement age?
* How will you know what “inflation factor” to use? The published, official inflation rate is one thing, but you may have heard that energy and food price changes are currently excluded from the Federal Reserve's computation of inflation. Without getting into a political discussion, many therefore consider that “actual” inflation is seriously underestimated.
* You still need to pay taxes during retirement, so you will not really have $40,000 at your disposal in our example.
Clearly, I am not a CPA or a financial advisor. I am merely someone who would like to retire someday and who is deeply concerned about how my colleagues, and especially their team members (technicians, kennel helpers, receptionists…), will retire one day.
Dr. Phil Zeltzman is a mobile, board-certified surgeon in Allentown, Pa. His website is www.DrPhilZeltzman.com. He is the co-author of “Walk a Hound, Lose a Pound: How You and Your Dog Can Lose Weight, Stay Fit, and Have Fun Together.”
1. “What's the latest thinking on how much I can withdraw from retirement savings?” by Walter Updegrave, Money, April 2011.